Energy’s Grand Divergence

Take a look at the long-term charts of crude oil and natural gas.  The historical oil-to-gas price ratio had ranged from 6:1 to 10:1 before the economic crisis.  Since one barrel of oil contains the energy equivalent of the 5.825 million BTU of natural gas, an implied BTU arbitrage kept this relationship in check.

Spot natural gas traded as low 1.905 earlier in the week implying an energy equivalent price of a barrel of crude oil of $11.10.  Spot crude closed at $105.23 on the same day.

Such a sustained divergence caused by new extraction technologies, such as fracking, is sparking the next “new big thing” as industries evolve to arbitrage the energy content of both fuels.  The market sniffs this and the reason the stocks of Westport InnovationsClean Energy Fuels, and Cheniere Energy have been flying.

(click here if chart is not observable)

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This entry was posted in Crude Oil, Energy, Innovation and tagged , , , , , , . Bookmark the permalink.

2 Responses to Energy’s Grand Divergence

  1. finsovet says:

    Reblogged this on Финсовет – Инвестиции без жадности и страха and commented:
    Возможность для технологического арбитража.

  2. It is important to understand the drivers of such movements:
    – The US Natural Gas forward curve is very upward sloping…
    – [reflecting… ] The depressed front-end is due to logistical problems (not enough liquefactions facilities in the US) that unable any exports / transportation of surplus nat-gas inventories.
    – International nat-gas prices (imported by Japan, for example) are multiples of US nat-gas prices

    Try the equivalence per BTU comparing Brent x long-dated US Nat Gas or Brent x Int’l Nat-Gas Prices.

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